In October last, finance minister Arun Jaitley had announced a major recapitalization plan involving infusion of Rs 2.11 lakh crore — spread over a few years — in public sector banks (PSB). The plan was – it goes without saying — intended to shore up the finances of the ailing banks that cumulatively have notched up non-performing assets (NPA) of Rs 9.5 lakh crore. Of the entire amount, Rs 88,139 crore was to be pumped into the banks by the end of this financial year (March 31).
As per the plan, the highest amount (Rs 10,610 crore) was to be given to IDBI Bank. This was not surprising considering that Mallya of Kingfisher Airlines has for all practical purposes run away with a loan amounting to Rs 900 crore from IDBI setting back the bank hugely. Rs 5,473 crore was to go to Punjab National Bank (PNB). But now these calculations might go awry.
After the NiMo (Nirav Modi) scam broke out, it is now revealed that PNB will take a hit of Rs 11,500 crore. Thus it is clear that this amount will not be sufficient for the bank, although it is premature to figure out how much more has to be pumped into PNB. The only thing that is certain is that it will be the tax payers’ money which will have to bail out the hoary bank that was started in 1894 in Lahore as part of the Punjabi renaissance.
Worse still, there is no guarantee that even after pumping in so much money, the NPAs of PSU banks will be sorted out forever and a few years down the line there would be no need to pump in more money to revitalize banks. “There is need to reduce interference in the running of banks. The babu- neta-shady businessman nexus have ruined banks. As long as this nexus is not broken, you can do nothing,” says the former chairman and managing director of a public sector bank who wants to be anonymous. He concedes that in recent years the general integrity of bank chiefs has gone down “because without making compromises it is impossible to rise to the top.” He adds: “So if your ambitions are overpowering you will make compromises and give out loans where they are not justified. Much of the money will go down the tube or will be diverted by the promoters. But how do you care?”
IDBI’s largesse to Mallya
A good example of this is the Rs 900 crore loans given by IDBI Bank to the ailing Kingfisher Airlines. In 2009 when the loan was sanctioned, Kingfisher Airlines was deeply in the red and had already eroded its share capital. The management of IDBI bank knew that as per its own guidelines, there was no justification for doling out more cash to Kingfisher. But under pressure from North Block that houses the offices of the mandarins of the finance ministry, the management of IDBI led by its chairman Yogesh Agarwal deemed it fit to fork out the extra money to Kingfisher on the basis of a questionable report. This report valued the brand of the Kingfisher name at Rs 4,000 crore! The brand value was obviously of the brand name of Kingfisher beer and not the airlines and Agarwal, an ace banker who had been managing director of State Bank of India before becoming chairman of IDBI, was no fool not to realize this. Since the Kingfisher case became very big after Mallya scooted from India, cases were filed against the top management of IDBI and they were arrested, but in normal circumstances nothing happens. Even in the case of Nirav Modi scandal only junior and middle management managers have been arrested. “The entire board of PNB should be sacked,” is the view in many quarters. “Junior officials bear the brunt. Many good officers can’t go up because the system is corrupt,” says a chief manager of State Bank of India who feels that he would have risen to the level of general manager if the system of promotions was not compromised. The view that the system of promotions in banks is severely flawed is echoed widely in banking circles.
The PNB scam is not the type of usual scam with huge sums being loaned on questionable collaterals. It is an absolute fraud with a junior bank official (at the lowest rung of management) transmitting SWIFT messages over the international system to correspondent banks telling that letters of undertaking (LoU) had been opened in the name of Nirav Modi companies. The LoU was a kind of guarantee that NiMo companies had kept collaterals at PNB and on the basis of this it was advising other banks with whom they had correspondent arrangements that they could give loans if they desired.
The loans were given to buy diamonds and under the usual convention the LoU should have been for 75 days but in an unusual practice PNB was given LoU for 365 days. It is suspected that much of the money taken in loan was not used for the purpose it was granted but was diverted. Moreover, the PNB made no counter entry in the book of the LoU – in what is called its NOSTRO account. So officially it was one junior officer who was supposedly perpetrating the fraud without anybody’s knowledge and in connivance with NiMo men. But this was patently false because the officer who was at heart of the scam had been allowed to operate for many years on the same desk without being transferred out. This implied that there was possibly connivance at many levels. In fact those who are aware of banking systems say that it is not possible that the branch controller – the general manager- who is supposed to have audited the branch quarterly – was unaware. If he was unaware then this throws light on the poor quality of management supervision at the bank.
Scripting a scam with ball-point pen
Close on the heels of the Nirav Modi scam, yet another case of perpetrating fraud against banks surfaced. The accused in this case are Rotomac Pens owner Vikram Kothari, and his Son Rahul Kothari who were arrested by the Central Bureau of Investigation (CBI).
Vikram Kothari’s wife Sadhna Kothari is also one of the accused persons. The CBI filed the case based on a complaint by Bank of Baroda that the Kotharis defaulted on loans obtained from a consortium of banks since 2008. The total loan amount was said to be Rs. 2,919 crore which had swollen to Rs. 3,695 crore what with the accrued interest and also repeated default.
The exposure of banks to the Rotomac case is: Bank of India – Rs 754.77 crore, Indian Overseas Bank – Rs 771.07 crore, Bank of Baroda- Rs 456.63 crore, Union Bank of India – Rs 458.95 crore, Allahabad Bank – Rs 330.68 crore, Bank of Maharashtra - Rs 49.82 crore and Oriental Bank of Commerce - Rs 97.47 crore, according to the CBI.
Bank officers cry hoarse
In fact, the All India Bank Officers’ Confederation has come out strongly against the government and the RBI for not giving adequate attention to governance of banks pointing out that misuse of SWIFT messages have been reported earlier too. They seem to suggest that privatization of banks that has come up as a solution for preventing bank scams in recent days (what with the chief economic advisor to GOI Arvind Subramanian batting for it strongly, followed by the CII and FICCI) may not be the solution because worldwide the prevalence of scams in private banks is probably worse than in state-run banks. Considering that one of the reasons for bank nationalization was that many banks were lending liberally to the promoters and their associates with nary a care, privatization of banks may not be the panacea. It might just lead to Nirav Modi and Vijay Mallya equivalents becoming bank owners! Of course being a smart politician (that too in the pre- election year), Finance Arun Jaitely realizes that. He has said that in the given circumstances it will be tough to get political consensus to push through privatization of banks.